Morning Star Candlestick Pattern

The Morning Star and Morning Doji Star are three day bottom reversal patterns. Just as the morning on earth predicts that the sun will rise, the morning star candlestick pattern suggests that prices will rise. The first day of the morning star pattern consists of a long bearish candlestick after a previous downtrend. The second day candlestick gaps down, therefore the candlestick opens at a lower price than the first day’s closing price. This second day candlestick must be a small candlestick and can be either bullish or bearish; however the key is that the real body of the second day is below the real body of the first day.

The third day of the morning star pattern is a large bullish candlestick that closes into the first day’s real body. The charting package of ThinkorSwim (2011) requires that the third day candlestick close above the midpoint of the first day’s candlestick real body. In addition, it is best that the third day’s candlestick gap up, but this is not absolutely required for the pattern’s validity.

Morning Doji Star Candlestick Pattern

The difference between the morning star and morning doji star is that on the second day, the candlestick is a doji for the morning doji star candlestick pattern. As a quick summary, a doji occurs where the opening and closing prices are roughly equal.

Abandoned Baby Bottom

If a doji occurs on the second day and the doji’s high price is less than the first and third day’s low price, then a very specific and rare form of the morning doji star has occurred and is called an abandoned baby bottom.

Psychology of Morning Star Candlestick Pattern

The psychology of the morning star candlestick pattern is described next. The first day of the morning star candlestick is a large bearish candlestick that reinforces the prior continual downtrend. The second day candlestick opens lower than the prior day’s close, thus gapping down and once again reinforcing that the bears are in control of the market. However, the bears are not able to push prices downward much further. The doji, or small real body of the second day shows there is a stalemate between the bulls and the bears. Only after the third day’s bullish candlestick do the bulls show that they are now in control of the market.

Traits of the Morning Star that Increase Likelihood of Trend Reversal

Nison (1991, p. 63) points out attributes of a morning star that increase the likelihood of a trend reversal:

There is indeed a gap between the first day’s candlestick real body and the second day’s candlestick real body and a gap between the second day’s candlestick real body and the third day’s candlestick real body.

The higher the bullish candlestick on the third day closes into the price levels of the first day’s bearish candlestick, the stronger the showing of the bulls.

There is low volume for the first day’s bearish candlestick, and in contrast, there is high volume on the third day’s bullish candlestick. High volume reinforces that bulls are serious about having reversed the previous bearish trend.

Morning Star Pattern Candlestick Chart Example

The chart above of the Energy SPDR ETF (XLE) is a textbook example of a morning star candlestick pattern. The previous 10 days could be characterized as a downtrend, with the first day of the morning star pattern being a large bearish candlestick (in fact a bearish marubozu candlestick). The second day gaps down and opens below the closing price of the first day. This is even more proof that the bears are in charge of the market. However, once prices reach the uptrend support illustrated by the blue line above, prices stall and bulls are able to make a small push higher. It is important to emphasize that the third day is required in order to complete the morning star candlestick pattern. If the third day opened lower and broke the uptrend support, then the bears would be in control once again. However, the third day candlestick opened higher and closed the day having penetrated over 50% into the first day’s bearish candlestick real body and completed the morning star candlestick reversal pattern. If a trader were to buy using this chart, they would have enjoyed nine bullish candlesticks over the next 10 days.

Morning Star Candlestick Pattern (3rd Day Higher Volume Than 1st Day)

One of the traits Steve Nison says increases the likelihood that a morning star candlestick is a bottom reversal, is that the third day’s volume should exceed the first day’s volume of the morning star pattern. Notice on the chart above of McDonalds (MCD) that the volume prior to the third day of the morning star pattern is falling; however, on the third day the volume increases, surpassing the volume of the first and second day. To quickly summarize, generally increased volume means increased attention by traders at the price levels representing that particular trading session. In the chart above on the third day of the morning star pattern, increased volume as well as a bullish candlestick can be interpreted that many stock shares were transferred between buyers and sellers and that the buyers had to buy at higher prices in order to get the sellers to sell to them. This eagerness and impatience by buyers to buy many shares and to pay higher prices for these many shares is a powerful sign of the bulls’ bullishness.

Morning Doji Star (and Abandoned Baby Bottom) Example

An example of a morning doji star candlestick pattern is illustrated in the chart above of Apple (AAPL). The morning doji star pattern follows a similar format to the morning star pattern with the exception of the second day candlestick being a doji rather than a small bullish or bearish candlestick. A doji is a great visual representation of indecision. As is seen in the chart above, the doji on the second day of the morning star doji pattern opens far below the close of the previous day, having gapped down. The long lower shadow of the doji shows that during the day bears were able to push prices far lower. Similarly, during the day, the bulls were able to push prices higher from the open of the day. Nevertheless, the bears move down was counteracted equally by the bulls, and the bulls move upward was counteracted equally by the bears, and eventually by the close of the day, prices were exactly where they had started at the beginning of the day.

Clarification only comes on the third day of the morning star doji candlestick pattern when prices rise over half-way into the price area of the first day’s bearish candlestick real body. Technically, the third day candlestick in the chart above is not a large bullish candlestick; in fact it is yet another doji. Even so, using Nison’s criteria for the increased likelihood of trend reversals of the morning star pattern, the third day doji candlestick gapped higher and the close of the candlestick penetrated about two-thirds of the way into the first day’s bearish candlestick.

Not only is the chart above an example of a morning doji star candlestick pattern, it is also an example of a rare abandoned baby bottom. To qualify as an abandoned baby bottom, the high of the second day must be below the lows of the first and third day; hence, there is truly a gap in the price action where no trades (i.e. no volume) occurred at those price levels in between.

Morning Doji Star (2nd Day is 2 Dojis) Candlestick Chart Pattern

It is possible for a morning star or a morning star candlestick pattern to consist of more than three candlesticks. Notice in the chart above of the Energy SPDR ETF (XLE) how the two doji candlesticks reveal the very same idea – the bulls and the bears are indecisive. Since the doji candles of both days could easily be combined into one candlestick without any loss of information, the above chart is easily considered a morning doji star pattern. The first day of the pattern was a large bearish candlestick, the “second day” was an indecisive doji day that was a gap down from the first day’s close, and the third day was a bullish candlestick that gapped up from the “second day’s” close and that penetrated over 50% of the way up into the real body of the first day’s candlestick. As a side note, the piercing pattern that occurred 15 days prior to the morning doji star pattern suggested a support level (shown by the blue line). Both dojis closed above that support line, giving even more confidence in the bullishness of this chart’s morning doji star candlestick pattern.